Monday, April 29, 2013

I testified
before the Subcommittee on Children and Families of the U.S. Senate Committee
on Health, Education, Labor and Pension last Wednesday, April 24, on the
economic importance of financial literacy for students. The full text is rather
long (as I discovered at the hearing from the watch in front of me that started
to count down from 5 minutes..). I provide an abridged version below, but if
interested, the whole text is here and you can also watch the hearing: http://www.help.senate.gov/hearings/hearing/?id=fe50f807-5056-a032-526e-7bd50274b965

Ms. Chairwoman and
members of the Subcommittee on Children and Families:

Thank you for
the opportunity to speak to you about the economic importance of financial
literacy for students.

I am the
director of the Global Center for Financial Literacy at the George Washington
University. As part of my research, I develop tools for testing financial
knowledge, conduct studies into financial literacy levels, and assess what the
results of those studies mean for the United States.

I am here today
to tell you that the vast majority of Americans do not have the financial knowledge
they need to fully participate in the economy or to make informed decisions
about their own financial futures. This reality has implications for their
lives and for the economic health of the country.

According to the 2009 National Financial Capability
Study, only 30 percent of the population can do a simple 2 percent calculation
and has a basic understanding of inflation and risk diversification, concepts
that are important in financial decision-making. The second wave of that study is
about to be released. It shows no improvement in the level of financial
knowledge between 2009 and 2012.

Financial illiteracy is not only widespread, but it
is particularly severe among specific groups of the population, including
people aged 18 to 25. These youths just out of school and young adults
beginning their careers are less financially knowledgeable than the general
population.

When we focus on high school students, the findings
are even more sobering. Data collected bi-annually by the Jump$tart Coalition for
Personal Financial Literacy show that only 7 percent of high school students
can be considered financially literate. These statistics have troubling implications.
Studies show that Americans who are not financially literate are less likely to
participate in financial markets or to invest wisely. They are less likely to
save and plan for the future. At the same time, they are more likely to rely on
high-cost methods of borrowing. This is a serious problem. Remedying it is
difficult, but adding financial literacy to the curriculum in schools would be
a good start. Academic research points to four reasons why we should launch financial
literacy efforts in schools:

1)The
first reason stems from the fact that financial illiteracy is widespread. That means
young people with poor financial knowledge are unlikely to learn from their parents,
other adults, or peers. Only a small fraction of students currently have access
to adults and peers who are financially literate.

2)The second reason to
include financial literacy in school has to do with equality. A failure to
understand financial concepts is especially prevalent among certain
demographics in the population. Data from the Jump$tart Coalition and other
surveys show that white male students from college-educated families
disproportionately account for the small percentage of students who are
financially literate.This is a
distinction that persists over the life cycle. Women, African Americans,
Hispanics, and individuals with low educational opportunities continue to display
very poor levels of financial literacy—much lower than their counterparts—at
middle age, before retirement, and into retirement.

This finding is strikingly similar and robust
across countries. In a study that compares financial literacy in eight
countries—Germany,
Italy, Japan, the Netherlands, New Zealand, Russia, Sweden, and the United
States—Olivia Mitchell from the Wharton School and I found that women and those
with low levels of education display disproportionately poor financial
knowledge. This is the case at all stages of the life cycle, from youth to old
age.

3)Another
reason to focus on financial literacy in school is that it is a necessary skill
for navigating today’s complex world. This is so evident that the Organisation
for Economic Co-operation and Development (OECD) last year added financial
literacy to the topics it evaluates in its Programme for International Student
Assessment (PISA). Financial knowledge now joins mathematics, science, and
reading in those tests administered to 15-year-olds around the world.

The PISA tests gauge
whether students are prepared for future challenges, whether they can analyze,
reason and communicate effectively, and whether they have the capacity to
continue learning throughout their lives. These assessments are conducted every
three years to help us understand if students near the end of compulsory education have acquired the knowledge and skills
essential for full participation in society.
Given these objectives, financial literacy seems to be an essential addition.

4)The fourth reason why
high school is a powerful place to teach financial knowledge is a simple one:
Young people need to understand how to make wise financial decisions before—not
after—they are faced with life-changing decisions. Most notable among those
decisions is whether or not to invest in higher education. Education beyond
high school has a tremendous effect on future financial security.

At the same time, whether and how to finance
higher education has changed dramatically in recent years. The cost of a
college education has increased rapidly in the United States, surpassing the
increase in both wages and inflation. This means that young people who pursue
degrees often start their careers with substantial amounts of debt.

There
is now a great deal of material available to help teachers and schools add financial
literacy into school curricula and to improve the quality of that education.
For example, we have national standards for financial literacy from the
Jump$tart Coalition for Personal Financial Literacy and, more recently, the
Council for Economic Education. The OECD also issued guidelines for financial
education in high school, and its International Gateway for Financial Education
serves as a global clearinghouse on financial education, providing access to a
comprehensive range of information, data, resources, research, and news on
financial education issues and programs around the globe.

Other
countries, such as the United Kingdom, recently added financial literacy in
their schools.

Young
people—not only in the United States but also around the world—face a new
economic environment with more complex financial markets. They will have more individual
responsibility in investing in their own education and in planning for their
own financial security during their working lives and after retirement. And
they will be doing this, among other things, on a global scale.

If
they are going to do this well, they must be equipped with the right tools and
skills. Just as it was not possible to contribute and thrive in an
industrialized society without basic literacy—the ability to read and write—so it is not possible
to successfully navigate today’s world without being financially literate.

There
is a cornerstone of economic theory: Where you have well-informed consumers,
you will find vigorous competition and efficient markets. In other words, financial
literacy is not only good for Americans because it allows them full
participation in society, but financial literacy is also essential for
business, the economy, the country and, in this age of globalization, the
world.

Thank you for this
opportunity. I would be pleased to answer any questions.

Sunday, April 28, 2013

I received the William E. Odom Visionary Leadership Award
last Tuesday, April 23, at a ceremony hosted by the Jump$tart Coalition for
Personal Financial Literacy. I was a very special evening which will stay
forever in my memory.

I had prepared a speech to deliver at the dinner and I
provide the text below. Thank you all for your support and for supporting financial literacy.

I am delighted to be here this evening to
receive this wonderful honor. When Laura Levine called to tell me about the Odom
Award, I was very happy. And contrary
to the findings reported in the studies about happiness, I can tell you that my
happiness lasted for days and days.

In fact, that happiness lasted until I
realized I’d have to give a speech. I was at this event two years ago...sitting at the table of Carrie Schwab when
she sang for her award. And I know that John Rogers gave a wonderful speech
last year. How do I follow that?

Like every good Italian, I called my
mother. Her first recommendation? No singing or dancing on the stage. That
killed my plans for arias from Tosca or any pirouettes. But my mother had some good suggestions.
She said, “Why don’t you speak about that PISA project you always tell us so
much about? Why don’t you talk about your passions, for example the new center that
takes so much of your attention?"

So let me start with PISA, the
Programme for International Student Assessment. As most of you know, in 2012
PISA added financial literacy to the topics it measures,together with math, science, and reading. I
chaired the group of experts that the OECD brought together to design PISA’s new
financial literacy assessment module.

It was a challenging assignment to design
questions to measure financial literacy among 15-year-olds in many different
countries. But the group brought a rich level of expertise to the task. We had
representatives from Treasury departments and from central banks. We had regulators
and representatives from the institutions in charge of financial literacy in
their countries.

I want to read to you what PISA gauges:

Are students well prepared for future challenges?
Can they analyze, reason, and communicate effectively? Do they have the
capacity to continue learning throughout life? Every three years the OECD Programme for
International Student Assessment answers these questions and more. It assesses
to what extent students near the end of compulsory education have acquired some
of the knowledge and skills essential for full participation in society.

This could as well serve as a brief
description of financial literacy, a
skill essential for full participation in society. And as PISA treats it,
it is like the other topics we teach in school, math, reading, science.

Over the last 3 years, the Financial
Literacy Experts Groups has met
in different cities around the world. Our first meeting was in Boston and since
then we have been to Paris, Budapest, Melbourne, and Heidelberg. I’d like to
say it was a happy project marked by exotic global travel … but in truth it was
one of the hardest projects I have ever undertaken. We spent days locked up in
hotel conference rooms designing the Financial Literacy Framework. We wrote – and
rewrote – the assessment questions many, many times.

Just so you have a sense of how
committed we are: We are the only PISA group that asked for an additional
meeting so that we could take a final look at the data, examine the findings
and, most importantly, discuss how to disseminate this work. Once the data is out, we hope it will drive
a big push for financial literacy in schools. Financial literacy makes a
difference in the life of young people and we hope we can make a difference
with our work and equip the young generations with the skills they need to for full participation in society.

One good feature about working in
financial literacy is that it is not hard to be passionate about it. Working
with other people who have a passion for this subject is the most rewarding
part of what I do.

My family teases me about the PISA
project. I first mentioned it to my parents – and the measurement issues
associated with it – during a rather quick phone call while I was on my way to
the airport to catch my flight to a PISA meeting. The next day I got two e-mails.
My little sister congratulated me … then commented that we are in trouble if an
economist is being asked to take measurement of the leaning tower. My older
sister, the more pragmatic one, asked if I could please arrange a visit to the
tower. They were clearly thinking of a different PISA!

I hope it is clear that in the eyes of
my parents I can do anything, even studying or fixing the leaning tower. I think
I ended up on the PISA project that was better suited to my skills/talents, but
I do believe that one of the reasons why I am here on the podium today is
because I was raised in an Italian family with very supportive parents.

And I am grateful to my parents for encouraging
me to seek my passion. I found it in financial literacy. I have been working on
financial literacy issues for the past 10 years… not only research but also trying
to disseminate the results of the research to a much wider audience than
academics. I am very proud of the Global Center for
Financial Literacy that I am building at the George Washington University School
of Business. My collaborators are here today and we are united in this mission to
spread financial literacy. I am also
working with many people and institutions who are here today, FINRA Investor
Education Foundation, the Council for Economic Education, and the Jump$tart
Coalition for Personal Financial Literacy.

I received an e-mail a few weeks ago
from a bank in Arizona asking for material we have written. I had no idea who
these people were. It turns out that the mother of my colleague, Kristen, had been talking about our center
to her friends and one of these friends was contacting us to ask how to help.

When your parents talk about what you do
and can relate to what you do, I think you are in a good job! And I don’t just
mean Italian parents but also American parents.

But we need more than passion for our
research. We also need funding. Back in 2005, I submitted a letter of interest
to a foundation for a new project on financial literacy. One afternoon, while
in my office at Dartmouth, I received a phone call. It was the CEO of that foundation.
In all of my time as a professor and in the many grants I had submitted, the
CEO of a funding agency had never called me. I thought, "This is an
organization I want to work with.”

My wish came true. I have been working
with the National Endowment for Financial Education and Ted Beck ever since. We
turn to him not just for funding, but also for his advice and wisdom. In
keeping with my Italian tradition, I think of him as our godfather!

Thank you very much for this award … and
for allowing me to take the stage. It was a good thing that I followed my
mother’s advice and did not sing and dance. But, if you are interested in the
other PISA, please let me know. I’m pretty sure I can arrange a tour.

My picture

About Me

Annamaria Lusardi is the Denit Trust Endowed Chair of Economics and Accountancy at the George Washington School of Business. Previously, she was the Joel Z. and Susan Hyatt Professor of Economics at Dartmouth College. She has taught at Dartmouth College, Princeton University, the University of Chicago Public Policy School, the University of Chicago Booth School of Business and the Graduate School of Business at Columbia University. From January to June 2008, she was a visiting scholar at Harvard Business School. She has advised the U.S. Treasury, the U.S. Social Security Administration, the Dutch Central Bank, and the Dartmouth Hitchcock Medical Center on issues related to financial literacy and saving. She is the recipient of the Fidelity Pyramid Prize, awarded to authors of published applied research that best helps address the goal of improving lifelong financial well-being for Americans. She holds a Ph.D. degree in Economics from Princeton University.